Trusts and Estates

Steuer v. Franchise Tax Board

Cite as A154691
Filed June 29, 2020, First District, Div. Three

By Matt Owens
Withers Bergman LLP
www.withersworldwide.com

Headnote: Trusts – Taxation of income  

Summary: California imposes income tax on the entire amount of trust income derived from California sources, regardless of whether the trustees reside in California.  

Syufy established an absolute discretion trust for the sole benefit of his daughter, Medeiros, a California resident.  The trust had two trustees—a California resident and a Maryland resident.  In 2007, the trustees sold stock, thereby generating capital gains on California-sourced income.  They reported the capital gains on the trust’s California fiduciary income tax return, and paid the income tax.  The trustees did not distribute the sale proceeds to Medeiros in 2007.  In 2012, the trustees filed an amended fiduciary income tax return for tax year 2007, alleging overpayment of $150,655 and requesting a refund in that amount under the theory they should have apportioned one-half of the capital gains to the California trustee as taxable income, with the other one-half apportioned to the Maryland trustee with no California tax owing on that one-half.  Following an unsuccessful administrative appeal, the trustees filed a tax refund suit in 2016.  The trial court granted the trustees’ motion for summary judgment, ruling that the trust’s California taxable income should have been determined by apportioning its income one-half to its California trustee and one-half to its Maryland trustee.  The trustees were awarded their requested refund plus interest.  The Franchise Tax Board appealed.

The court of appeal reversed the trial court’s apportionment ruling.  A trust is taxed on all of its California-sourced income regardless of the trustees’ residency, while apportionment based on the number of resident trustees only applies to non-California-sourced income.  Taxable income of any nonresident includes California-sourced-income, and trusts compute taxable income in the same manner as individuals.  The trustees were not entitled to apportionment of the California-sourced-income based on one trustee’s out-of-state residency.   

http://www.courts.ca.gov/opinions/documents/A154691.PDF

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